From the discussion on the brands, we can probably derive that, the old advantage of brand is still very much present but not as strong as earlier in pre-amazon times. So, we need to make sure that KRBL is not milking its moat of better quality by charging too much premium like Gillette did. If customers feel the premium is too high for the difference in quality between KRBL (ex: India gate Classic vs Daawat’s premium product) & its next best competitor, then there is always danger of customer moving to competitor’s brand based on Amazon reviews. Since Basmati is cultivated only in India & Pakistan, I guess, it will not be very difficult to track amazon ratings of the KRBL’s and competitor’s products.
Although, it is bit far away in future to affect KRBL, but certainly of relevance.
The new generation does not care much about finer points of quality & taste too much.
Out of the four non plain Basmati rice products KRBL has, I believe, sprouted Brown Basmati rice could be one product to look out for. There is lot of talk of growing number of health conscious people looking for variety of healthy food alternatives. The regular brown rice is not palatable. The brown basmati rice is certainly better than regular brown rice. With sprouted brown rice, it becomes easier too cooking too and should be easier to eat (brown rice is harder even after cooking).
The three other products Quinoa, chia seeds & flax seeds, KRBL will not have any competitive advantage over HULs or ITCs or private labels of other Super Market chains as far as my novice understanding.
Yesterday, at a family gathering, for the first time, I had a preparation made from rice by India Gate. The product is called India gate Super rice. It costs around 160 rupees a kilogram. It was indeed, a fine product. Throughly enjoyed it. However, there was also rice from DMart, which, if not better was as good as Super.
Dmart Basmati is available for around 70 rupees a kilogram. For a middle class person like me, I sure enjoy India Gate rice but I don’t possess the wherewithal to pay more than twice the price of Dmart’s rice. So, basically, the premium was not worth the experienced utility, for me. Just my thoughts.
What if the growth rate is greater than the risk-free rate? Like in this case the actual recent sales growth is 10.62%. How can we work the valuation then?
@dineshssairam, I was listening to Mr. Mohnis Pabrai’s recent speech to Chinese students. Mohnis Sir emphasized that he invest in the idea only if he foresees minimum value worth 100% return. Going by this, his investment @Rs. 589 must have been initiated when he would have assessed the value at the minimum of Rs.1178(2*Rs.589). This number is significantly higher than value as calculated @Rs. 525. in spreadsheet. Can there be certain factors envisaged by Mr. Pabrai in his assessment which would have provided his such a huge conviction.
I completely agree with the fact that even ace investors can make mistakes in their investment thesis and investment in KRBL might prove to be one of it.
You can play around with the assumptions to see what Monish Pabrai might have assumed in his Valuation. In any case, I’d say KRBL is definitely not a ‘deep in the Value’ buy for him.
I did some simple number crunching for last 5 years for KRBL. It looks like that all the growth will come solely from India biz. Last 5 years export revenue has been
FY13 FY14 FY15 FY16 FY17
939.44 1274.44 1287.13 1749.97 1084.35
I am expecting FY 18 to end with closer to 1300cr revenues as management expects 20% growth in export revs. This is visible in 9M results.
FY16 was an aberration as they got some tendering order. We can clearly see that in the last 5 years, there has hardly been any growth on the export front. Saudi is their major market but there is a little to no inflation there hence I don’t expect much price growth there apart from changes in Basmati rice in international market.
On the other hand, management has clearly said that they can’t entirely pass on increase in paddy prices because there already sell their rice at premium.
Only future growth market I see is China where we haven’t made any inroads yet.
On the other hand, domestic rice biz is growing at a decent pace.
FY13 FY14 FY15 FY16 FY17
1016.64 1497.9 1696.5 1389.97 1821.85
FY16 revenue was less because they had to serve the iran tendering order. FY18 is expected to be on the lines of FY17 because of GST disruption as per management. So they have basically grown their revenues by 30 odd percent from FY14-FY18 which is decent I think.
The third aspect is their power biz. You would be surprised to see the PBT growth of power biz
FY13 FY14 FY15 FY16 FY17
6.7 6.09 38.77 46.12 55.18
I am expecting FY18 to end with 80 odd crores by looking at 9M trend. It has added in big amount in showing higher profits of the company
One more thing adding to their profits is falling interest cost. They paid 77 crore of interest in FY12 and I am expecting that they will end this year with 30 odd crores of interest cost.
The company can become a debt free easily by FY20 end if they want to, which gives me a comfort that in case of any bad cycle, it won’t go bust.
From all the number crunching that I did, I think Mohnish Pabrai paid a huge premium to own a India consumption story. 20-21 kind of PE is good enough for KRBL as their India growth is not that fast and export growth is almost stagnant from past 5 years and it is likely to remain like that.
Disc.I added some at 450 levels after looking at the sharp fall. Did my number crunching in last 7 days and realised that I am not buying a cheap biz.
Lot of FMCG companies with brand are trading at 40+ PE. They don’t have growth too. What they have brand and visibitly. Hnece, high PE. Why can KRBL trade at 40 PE? Just a question to ponder. Have seen their quinoa packing. One can see serious effort to establish a brand with value proposition and establish a connect with customers on health grounds.
Well their ROCE levels are closer to 40 I am not wrong. Higher ROCE number leads to higher PE. Anyway I think most of the PE expansion happens when the growth is on a higher trajectory rather than 5-10% growth rate.
Few more differences between FMCG and rice companies
Working Capital requirement of KRBL is higher at more than 200 days as compared to FMCG companies who on various occasions have negative working capital
pricing power - arguably, Rice companies while having a brand still is closer to commodity companies and FMCG companies have higher pricing power as compared to rice companies
In my opinion, there are multiple reasons why FMCG companies enjoy a significant premium over KRBL and peers-
The massive market size and potential for growth for years to come.
People may or may not eat rice but they sure brush their teeth(toothpaste), wash their clothes(detergents), enjoy beverages, use soaps,etc.
These are goods it’s hard to survive without.
The fine execution by FMCG companies over the past few decades.
Investors trust the exceptional capability and repeatedly repose faith.
Their consistency in growth.
It’s a given that FMCG companies will grow.
Overall optimism on India’s consumption story.
Top class parentage of most FMCG companies also plays a role. They’re believed to have high corporate governance standards.
And, visibility for earnings growth for years to come.
Ability to cut costs and increase prices.
To an extent there’s price inelasticity.
Tremendous mind share occupied.
Even today, despite the launch of several instant noodles, for me nothing comes close to Maggi noodles. It’s the precious mind related estate they’ve occupied.
These could be the factors.
Now, I don’t know if the valuations commanded by FMCGs are justified or not. But, the aforementioned points could be the driving factors for sustaining such elevated valuations.
KRBL investment by Pabrai funds does not seem like a DCF kind of investment … its more about the story and the runway … Mohnish Pabrai has paid upfront for the long runway, let us see how it pans out. I am a big fan of Mr Pabrai, so it will be all the more interesting to watch the story unfold.
Disc: invested some amount after Mohnish invested …
My reentry into KRBL investment largely influenced by big names entry, coupled with recent correction in price, but still for me, im biased to price anchoring, as my initial investment into KRBL was at very low price couple of years ago.
I would be very much looking at these factors, to build up my conviction for investment in KRBL;
What are the major factors/ triggers for the next leg of growth? was it coming from India consumption story? or
Export market other than Middle east? like foray into China etc., or
Introduction Health conscious products ?
Middle east market already reached to a mature level? geopolitical tensions, lower range of oil prices, does these have any headwinds for immediate growth?
As an user for many years, i will stay with KRBL India Gate(IG) classic for the sustainable quality being delivered with reasonable premium in price to its competitors.
I have taken some pictures from the shelves of Lulu Hyper market during weekend here in Saudi Arabia, Alkhobar. You will get IG Classic at almost every super /hyper markets here in Saudi (at least in eastern region province), where as Daawat or Kohinoor in selected stores.
~8% of premium commands by IG Classic with their peer brand Kohinoor. In my personal view, it is reasonable, ok for the buyer to stick with the tested, proven quality & good taste brand of IG rather to switch for this kind of diff of price…
~33% higher to other Lulu brand (owned by Lulu) which may not be a nearest competitor.
~3% of premium commands by IG Classic with other brand Mehran brand from Pakistan.(price comparison for 2KG packs). It is also a known brand but never tried their Basmati rice though so not aware of quality.
My thoughts-
KRBL is a fine company led by dynamic promoters. They have great products to offer. But, in my opinion, KRBL is a well discovered stock. Over the past couple of years it has garnered a lot of attention. And, when too much attention is showered on a particular stock the pricing becomes fairly efficient. Yet again,in my opinion, such stocks behave like an efficient market. By efficient I mean that everything that’s known to the public is already discounted. The big moves will be due to information flow we are not aware of. That’s purely luck.
Regarding KRBL’s future growth prospects-
In my understanding, as incomes rise, the percentage of calories derived from rice decreases. People can afford different food products.
But, I can say with reasonable certainty that in regions where rice consumption is dominant, as disposable income increases there will be some migration to Basmati rice. But,increased Basmati rice consumption doesn’t necessarily mean India gates share of the pie increases.
A major driver for India Gate will be their customer’s loyalty to it. I don’t see a lot of middle class Indians shifting loyalties to India Gate rice. It’s very expensive for most. For most people all that matters is improving the quality of food they consume. So, if they graduate from a bad rice variety to Basmati that’s more than enough. The brand won’t matter.
To summarise- Major drivers will be upper middle class, wealthy who currently are consumers.
Also, I strongly believe that they should diversify.
And, it’s good they’re taking steps. How successful their efforts are only time will tell. But, reliance on one product for steering the company could have disastrous consequences.
Yes, i concur that it is well discovered stock, valuation wise it is not compelling buy as it was earlier, however i may be wrong here or underestimated to understand the theme. Looking at the current market and availability of several number of quality businesses at fair valuation, i’m yet to be fully convinced to increase my allocation.
Will wait and watch to see the execution by the management to steer the company for next level of growth.
